It interesting to note how former FCC Chairman Tom Wheeler passively and aggressively defied the House and Senate post-election requests for the agency to focus "only on matters that require attention under the law." In ignoring that Congressional request, on December 1, 2016, Wheeler ordered the Wireline Competition Bureau to designate 4 carriers as "eligible telecommunications carriers" ("ETC's") for purposes of participating, as broadband providers, in the Commission's "Lifeline" program, which offers a $9.25/month subsidy to carriers serving low-income customers. Then only two days before Chairman Wheeler left the Commission, the Wireline Competition Bureau, without Commissioner input, went ahead and designated 5 additional carriers as broadband ETCs.
To put the Bureau's actions into context, consider that since the FCC first initiated reform of its Lifeline Rules back in March, 2011--it has designated exactly 0 carriers as wireless, or broadband, ETCs. Thus, in more than 6 years the FCC made no ETC designations, despite having applications that have been pending for longer, and from equally--or better--qualified applicants. Oddly, the recent ETC Designation Orders offer no explanation for why these carriers, out of all the pending applications, were chosen for approval.
So, it's against this backdrop, that Chairman Pai took the incredibly wise and unremarkable step to request a pause and take a second look at the two orders, which represented the first agency action on ETC designation in at least 6 years. Nevertheless, that did not hold the Washington Post back from breathlessly issuing a sensational, and misleading headline that the "FCC is stopping 9 companies from providing subsidized broadband to the poor."
By Monday, the story grew only more misleading as activists on the Left amplified it on social media. Against this backdrop (keeping in mind that Chairman Pai's very first policy pronouncement to the FCC's staff prioritized the importance of improving the quality/speed of broadband service available to rural and low income Americans), the Chairman, on Tuesday, personally penned an article on Medium, explaining in detail the Commission's recent decision.
Perhaps concerned that a good fake-news-cum-Twitter-outrage-campaign story was going to die from exposure to the cold hard facts, Gigi Sohn, a former senior advisor to previous FCC Chairman Wheeler, penned her own blog post yesterday--to address a "controversy" resulting from a misleading article (that she probably sourced in the first place). In her post, she argues that Chairman Pai's Medium article "doth protest too much" and that his "arguments fail to mask two clear truths."
While the normal use of the Hamlet line "doth protest too much" means the person protesting actually supports the conclusion they argue against, it's obvious that Sohn does not think that Pai secretly supports the previous FCC's post-election change of policy. Moreover, even though the "clear truths," to which she refers, are both actually "arguments;" let's look at these.
The first "clear truth" she argues is that Pai's "actions will make the market for Lifeline broadband services less competitive, limiting choice and keeping prices high." But if you read the two ETC Designation Orders, you will see that the only firms that are already selling their "broadband" services are wireless resellers offering 3G and 4G data as part of overall wireless plans. This is not to impugn these firms' offerings, but to clarify that the same offers were already available to Lifeline consumers from other carriers, e.g., here,--and will remain so, despite Pai's decision to rescind these designations.
Yet, if Sohn felt this strongly about the merits of Lifeline "competition," why didn't she and Chairman Wheeler approve more qualified providers as ETCs, starting at the beginning of his term as Chairman? I, personally, have a client that--during the terms of the last 3 Democratic FCC Chairs--has consistently been rated as the "best," or among the very best, wireless service providers in the country, and which has been waiting over 7 years for ETC Designation.
The second "clear truth," which Ms. Sohn believes Chairman Pai's Medium article exposes, is that "[Pai] and fellow FCC Commissioner Michael O'Rielly, fundamentally disagree with the structure and goals of the Lifeline program and will seek to undermine it in word and deed." This statement is a textbook example of the logical fallacy of ad hominem, in which an argument is rebutted "by attacking the character, motive, or other attribute of the person making the argument, or persons associated with the argument, rather than attacking the substance of the argument itself." Here, Ms. Sohn fails to refute any reason proffered by Chairman Pai for taking a second look at the ETC Designation orders, and simply accuses Pai, and the other Republican FCC Commissioner, for having some broader "evil" motive ["disagree[ing] with the 'structure and goals of the Lifeline program'"] unrelated to this specific dispute.
If there is one thing that Ms. Sohn's blog post does successfully convey, it is to give us a better idea of where the first misleading headline came from, at least in terms of motive. Perhaps if Sohn took less "surprise and delight" in someone else having to defend themselves against misinformation, then she could have advised Chairman Wheeler to take an interest in Lifeline competition before being asked by Congress to focus only on matters "that require attention under the law" prior to the change in presidential administrations.
This morning, FCC Chairman Wheeler and Commissioner Pai spoke to the House Appropriations Subcommittee on Financial Services and General Government to make a formal request for the agency's FY 2015 budget allocation. View hearing here. Today's hearing was a more formal re-run of the briefing that the Chairman and Commissioner Pai gave the Subcommittee on Tuesday, when the FCC provided information on the agency's request for a $36 million increase in the FCC's allocation in the FY 2015 budget. The Commission's total budget request for 2015 was $375 million.
First among the FCC's budget priorities was securing an additional $10.8 million for USF improvement, directed mostly at policing the Lifeline program (which is intended to provide discounted telephone service for low income Americans). As this Bloomberg BNA article reports on the Tuesday briefing, the Chairman told the Subcommittee,
"We need more muscular enforcement about what is going on in universal service," Wheeler said. "The Lifeline program has been abused. My line from day one is, 'I want heads on pikes' and we need enforcement capability we don't have."
The Chairman's statement that he "want[s] heads on pikes" is a nice, political thing to say, given that the program has been under scrutiny, after ballooning in the wake of the Commission's decision to allow program participation by wireless carriers in 2008. The Commission took major steps to reform the Lifeline program rules in 2012, which led to a decline in total (non-Tribal) Lifeline subsidies from a peak of $2.13 billion in 2012 to $1.77 billion last year. See app. LI07 here.
The Commission, however, has yet to complete the most basic part of its Lifeline reform NPRM initiated in 2011--determining the correct subsidy for wireless carriers. Given that the growth in the Fund has come entirely from wireless services, one would think that getting the wireless carrier subsidy correct would be job #1.
The FCC Is Required to Establish Prudent Carrier Reimbursement Costs
The Lifeline program subsidizes consumer discounts through reimbursement payments to the consumers' service providers. The relevant statutory provision that deals with Lifeline provider reimbursement is 47 U.S.C. Section 214(e), which says,
A carrier that receives such support shall use that support only for the provision, maintenance, and upgrading of facilities and services for which the support is intended. Any such support should be explicit and sufficient to achieve the purposes of this section.
(emphasis added). The plain language of the statute indicates that Congress didn't want the FCC to be deliberately spending more than was necessary for the provision of the relevant facilities/services.
This only makes sense. After all, if the subsidy is in excess of wireless carrier costs, then the Commission is not only failing to implement the law, but is (effectively) subsidizing wireless carrier profits rather than merely reimbursing service costs. The distorted incentives that excessive subsidies create also contribute to an even greater need for the enforcement resources the Commission is currently seeking.
Wireless Reimbursement Costs Should Be Lower than Current (Wireline) Subsidies
In this post from several months ago, I explained--with numbers--how the wireless lifeline business is able to make money off "free" service. The 2012 Lifeline Reform Order retained, but simplified, pre-existing average "per customer" reimbursement rates of $9.25--which were originally established to offset costs to serve wireline customers.
As I explained in more detail in the earlier post, the average wireless Lifeline customer will have a direct wholesale cost of $4.875/month to serve. In return, the carrier receives $9.25 from the USAC. If we estimate indirect costs at around $2.00/line (say $1.875/line), we can see that it is not out of the question for a fairly typical wireless Lifeline provider to earn around $2.50 per line served per month ($9.25-$6.75).
How Much Could the FCC Save Consumers by Fixing Wireless Cost Subsidies?
Last year there were about 14 million non-Tribal Lifeline subscribers. See LI08 appendix. About 80% of Lifeline consumers use prepaid wireless service, which amounts to about 11.2 million wireless Lifeline subscribers. If the FCC should be reimbursing these subscribers' carriers $6.75/month instead of $9.25/month, then the USF and its contributors would save $22.4 million/month--or $268 million/year.
In other words, if the FCC simply finished the part of the Lifeline Reform Order that the FCC should have addressed first, the Commission could annually save consumers about 70% of the projected costs to run the entire agency. It goes without saying that the Chairman's next budget briefing would be an easier "ask" if he could assure lawmakers that the Commission is putting most of that number right back into consumers' pockets--while still supporting the vitally important benefits provided by the Lifeline program.
One day several years ago, when I was still at COMPTEL, a friend of mine at one of our member companies was trying to convince me (for probably like the thousandth time) not to keep banging my head against a wall on an issue that I can't even remember. This time, though, he put it differently, and I still remember his advice. He said, "Why do you have to play the Yankees every day? Why can't you take a break sometimes. . . maybe play the Brewers every once in a while?"
Well, that is the best way to describe the advice I would like to have given the FCC if I had a chance to read their 2012 Lifeline Reform Order before they adopted it. Because, if you had the chance to change anything about the Lifeline program, wouldn't you at least want to get all the parties on your side?
Administering a huge, and growing, program like Lifeline is hard enough. Not questioning a prevailing retail price of $0/month leaves the FCC wrestling the "invisible hand" of the market--a Sisyphean proposition. Wouldn't you want to do everything you could to align the incentives of all the program participants with yours?
The Wireless Lifeline Business
The curious thing about the Lifeline Reform Order is that while prepaid wireless service is generally understood to be the primary cause of the fund's rapid growth--which precipitated the Lifeline NPRM--there is no evidence at all in the order that the FCC even tried to understand the prepaid wireless business. So, let's try to see if we can figure it out.
The typical prepaid wireless Lifeline "offer" goes something like this: the customer is promised 250 "free" minutes per month, as well as a "free" handset. If the customer wishes to use more than 250 minutes, they can purchase additional minutes at a fair, but profitable, price.
From a cost perspective, this 2009 Fierce Wirelessarticle references wholesale voice prices available to some MVNOs that are below 3 cents/minute. Four years later, it is probably a very safe, even conservative, assumption that most Lifeline MVNOs can get at least a 3.25 cents/minute wholesale rate.
So, if the prepaid wireless carrier is spending $8.125/month (250 mins * $0.0325/min) and only receiving $9.25 from the fund, how are they making money? Even at 3 cents/minute, the possibility of profit would still seem fairly remote ($9.25 - $7.50 = $1.75), because we are only looking at the direct costs of providing service (the amount owed to the wholesale carrier). Adding on an indirect cost (employees, cost of sales, overhead, etc.) of say $2/line (just a guesstimate) would still leave a carrier in the negative.
In reality, the typical customer will actually use something less than the 250 minutes. For purposes of our illustration, let's assume the average customer uses about 150 minutes. We can safely make this assumption, because the prepaid wireless Lifeline business--like every flat-rated pricing plan--is based on "breakage." This means that the average customer consumes less than they pay for. In the case of wireless Lifeline service, the "they" that is paying is you and I. Remember this point, because we'll come back to it.
Assuming a price of 3.25 cents/minute and an average use of 150 minutes/month, the average customer will have a direct wholesale cost of $4.875/month to serve. In return, the carrier receives $9.25 from the USAC. If we estimate indirect costs at around $2.00/line (say $1.875/line), we can see that it is not out of the question for a fairly typical wireless Lifeline provider to earn ($9.25-$6.75) around $2.50 per line served per month.
Reimbursement vs. Reward
Remember the part about the flat-rated plans relying on "underachievers" for carrier profitability? That's great for the carrier and the few "overachievers", but "we" are the ultimate consumer--the whole "buy" side of the market, if you will. And, we--under the law--are only allowed to "reimburse" prepaid wireless carriers, i.e., cover their $6.75/month in costs.
The relevant statutory provision that deals with Lifeline provider reimbursement is 47 U.S.C. Section 214(e), which says,
A carrier that receives such support shall use that support only for the provision, maintenance, and upgrading of facilities and services for which the support is intended. Any such support should be explicit and sufficient to achieve the purposes of this section.
(emphasis added). The plain language of the statute certainly seems to indicate that Congress didn't want the FCC to be deliberately spending more than was necessary for the provision of the relevant facilities/services.
How to Get Real Lifeline Savings?
Let's say there are 16 million Lifeline subscribers (close enough) and 80% use prepaid wireless service, then there are about 12.8 million wireless Lifeline subscribers. If the FCC should be reimbursing these subscribers' carriers $6.75/month instead of $9.25/month, then the fund could be paying $32 million less per month--for an annual savings of $384 million/year. Now, that beats the heck out of sweating USAC and the carriers to try to squeeze the limited savings that we might get from the existing "reform" rules, no?
But the savings don't stop here. Prepaid wireless Lifeline service adds a wonderful choice for low income consumers, and it's silly to think that if the FCC got the subsidy right, the service would go away. It wouldn't; but the wireless carriers would have to start charging a small positive monthly fee in order to stay profitable.
A minimal fee (say $5-$7/month) would not only give the service providers more money, which would not only allow them to offer more data, but it would also remove the incentive for "inefficient consumption" (to use a euphemism) that today's $0 price creates. Thus, if customer carelessness or dishonesty were responsible for any significant amount of program waste, the FCC could correct this more easily by realigning customer incentives than by placing more administrative burdens on carriers.
How Hard Is It?
In the Lifeline Reform Order, the Commission comes up with all sorts of excuses for why it couldn't do what we just did here. I won't rebut each one, though none of the excuses would stand up to any scrutiny. The most damning fact, though, is that the FCC could have quickly gotten an accurate subsidy amount simply by looking at average wholesale billing information from no more than 4 carriers. In fact, they could have gotten the whole story just from Sprint, who has a large wholesale and retail role in the Lifeline program.
If it's that easy--and it is (no OMB approval needed)--then what's the excuse for not just going to the source? The benefits of significant annual savings, ensuring customer cooperation, and sparing the vast majority of good customers the demeaning, uncivil debate currently raging seem like a prize worth a casual inquiry, don't they?
In the last post, we talked about the generally uncivil and unproductive tenor of current arguments over the Lifeline program. I've already mentioned that I would have liked the FCC to have taken a more holistic "once and for all" approach to modernizing the Lifeline program. The Commission's decision was a mistake for at least two reasons.
First, by deciding to ignore some of the seismic changes in the telecommunications market since the original Lifeline rules were adopted, including the shift from monopoly to competition and consumers' enthusiasm for wireless, the Commission left itself with very few options for "reform" and "modernization." In fact, by failing to undertake any reforms based on the structure of the modern telecommunications market, the Commission pretty much forfeited any claim to Lifeline "modernization."
The second reason the FCC made a mistake by not taking a comprehensive evaluation of the Lifeline program when crafting program reforms is that the FCC left itself with fewer chances to succeed. In other words, by focusing exclusively on reforming carrier and consumer practices in order to prevent duplicate and ineligible disbursements, the FCC "doubled down" on its theory that waste and fraud were the primary cause of the $1.3 billion increase in the Lifeline program between 2007-2012. Here at p. 2
So, did the FCC win the bet? Well, the Lifeline Reforms have been in effect for almost a year and a half, and yet the political acrimony over the size and administration of the fund has only escalated. What do you think?
The Lifeline Reform Rules
As we noted, the primary focus of the new Lifeline rules is to eliminate waste, fraud and duplication in the program. Unfortunately, this burden was transferred squarely to service providers. As a result of the new rules, carriers now have the responsibility to confirm eligibility of applicants, keep better records to help eliminate intra-company duplicates, and to educate applicants about the consumers' duties under the program. In other words, carriers got a lot more risk and no more resources to manage that risk.
One big change on the near horizon that could result in some measurable efficiency improvements to the fund is the duplicates database. As we saw with the NALs recently announced by the FCC, data entry and record-keeping errors can always result in some (relatively small) number of duplicate claims within the same company. However, the largest amount of duplicates result from the same customer getting service from multiple providers.
For example, let's say the customer has been receiving wireline Lifeline service for a long time from one carrier, then perhaps another member of the subscriber's household signs up for wireless Lifeline service from a different carrier. The error could be inadvertent, but today it doesn't get caught unless or until USAC goes through a study area with a lot of in-depth validation (IDV) audits and then compares subscriber lists between carriers.
When the database gets up and running, all of these duplicates will get identified and eliminated in every study area before they result in duplicate recovery from the fund--and without a lot of intensive audit work by USAC. This will reduce the size of the fund. But, what about the other reforms?
The most significant reform so far, in terms of controlling fund size, has been the requirement that Lifeline providers re-certify their entire customer bases each year. For 2012 the Lifeline fund disbursed $2,190 million. For 2013, the fund is expected to disburse $1,812. See here at p. 25. So, savings over the past year resulted in around $378 million.
Still, this year was the first year of mandatory re-certifications, and many customers had not had contact with their service provider in quite some time leading up to this year's re-certifications. It is doubtful that next year's re-certifications will remove anywhere near this number of customers from the fund. Without this significant one-off reduction in the size of the fund, how much has the fund benefited from the new rules?
While we've said that the total amount of duplicate reimbursements received by the five carriers in the NALs was a total of $73, 250, the total amount of overpayments received by these carriers was likely much higher. In fact, I would guess that the main reason the level of fines was so high, relative to the overpayments alleged, is because the carriers in the NALs chose not to settle. If these carriers had settled with the EB, they would have had to pay the fund back all of the overpayments received throughout the carriers' service territory for the previous 12 months.
If we make the wildly optimistic assumption that each firm with an NAL over-recovered $500,000--and had settled with the EB--the total amount the fund would have saved since the Lifeline Reform Rules went into effect would have been--at most--$3 million (the 5 NALs plus 2 settlements earlier this year). To be fair to the FCC, though, I know that USAC also engages in a lot of "ordinary" recovery through its frequent audits. However, I have not been able to find the amount of their audit recoveries. Thus, let's be super conservative, and estimate that the Lifeline Reform Rules (through USAC audits and FCC enforcement) save the fund about $10 million/year (out of a $1,812 million fund this year).
In our final installation of this series, we'll look at what the FCC should have done in its NPRM if it wanted to comprehensively reform Lifeline. We'll also look at the savings the fund could have reaped if the FCC had made even a tiny effort to holistically reform Lifeline.
In the last post we mentioned the letter from the 44 House Republicans, who with no sense of self-awareness, sent the FCC a letter during the shutdown where they referred to the Lifeline program as representing "everything wrong with Washington." Sure, it was wildly hyperbolic, but--admittedly--not completely baseless.
But before we get started in discussing the "state of the debate," it helps to know some history--because understanding the real facts--is necessary to fully appreciate the bedlam that characterizes the current state of the "conversation." The best piece I can recommend--which keeps with the theme of "why are we here?"--is this entertaining and informative blog by Harold Feld, explaining the ironies of Lifeline.
Where We Are: The "Uncivil" War
If you've paid any attention to Lifeline over the past few years, you'll also recognize that the House Republican letter is hardly the first time that the Lifeline program has been portrayed as some kind of political litmus test, implying that if you support Lifeline you are na´ve at best, and grossly irresponsible at worst. For a debate in which few, if any, of the program's opponents have any experience with the Lifeline program, the level of rancor in this "debate" is truly without equal.
Even worse, some "political activists" on the "anti-Lifeline" side try to generate opposition/hostility toward the program by associating the Lifeline program with the most appalling, frequently racial, stereotypes of poor people. For example, who can forget the "Obamaphone lady?" More recently, there was this deceptive video that circulated over the Summer from political activist (and pseudo-journalist) James O'Keefe.
What's notable about O'Keefe's video is that it features actors, acting out the worst stereotypes of low income people. People viewing the videos aren't reacting to anything that is actually being depicted in the video, rather they are being manipulated by a storyline created by the narratives of actors with a political agenda.
But there wouldn't be a rancorous debate unless both sides were participating. So, as dishonest and deplorable as the "kill Lifeline" side is, the advocacy of the "save Lifeline" side is as insipid as it is unpersuasive. The "save Lifeline" crowd has a website called Lifelineconnects.org. On the website, you can look through their news clippings on their advocacy activities. The group has done some advocacy at the Commission, and they have had advocates for the program testify before Congress. Do you know what their message is? Lifeline is good. Beyond anecdotes of how Lifeline is helping a few deserving people, there is very little of substance on the web site.
How We Got Here
The one uncontroverted fact about the state of the Lifeline program is that it has become wildly controversial over the last several years. But, how did it get to this? It didn't start that way; Lifeline started as a reasonable, bipartisan program to ensure that all Americans had access to basic communications services. The addition of wireless service to the program in 2005 was merely an evolution of the program's founding principle.
So, when it became necessary to update the program--only a few years ago--it was clear that the program needed changes. Starting in 2009--which, it should be noted, was a very bad year for the U.S. economy--the USF's low income fund began to grow dramatically.
In early March of 2011, the FCC released its Lifeline/Link Up NPRM to discuss changes to the Lifeline program that would help modernize the program and put it on a more stable foundation for the future. The NPRM identified the dramatic growth in the low income fund as the primary factor leading to the conclusion that the Lifeline rules needed to be revised.
While the growth in the fund was the real issue that needed to be addressed, rather than to try to understand the basis of this phenomenon and to deal with the larger implications of the growing low-income fund in a holistic way--addressing USF contribution reform along with reforms to the Lifeline program--the Commission took a short cut and assumed that most of the problem was the result of the influx of prepaid wireless "Lifeline-only" service providers, who must have been running amok. New rules on service providers, the Commission said, would surely solve the problem.
This one lazy assumption is what set the table for all of the successive, unproductive, rancorous debate over Lifeline's future. Because, after all, when you limit the possible explanations for fund growth to one--waste--then every service provider and every consumer participating in the program becomes part of the problem. Thus, the eventual result of the Commission's approach--that the future of the Lifeline program would be the victim of an unproductive war of political values--was hardly unforeseeable at the time, as I explained in this blog.
Given where we are, in terms of the level of the conversation about the future of Lifeline, does anyone honestly think that a solution to Lifeline's real problems is going to come out of this protracted "Sumo match" of opposing political values? Neither do I. But, if the Commission is to rescue Lifeline, they'll have to start understanding the relevant facts.
In the next installment in this series, we'll look at how the wireless Lifeline business works, and how the Lifeline Reform Rules are working. Finally, in our last installment, we'll talk about realities that the Commission must recognize, and the changes that must be made in order to stabilize the Lifeline fund.
Last week, I tried my hand at writing a satirical post, supporting Dr. Anna Marie Kovacs' excellent study for the Internet Innovation Alliance. I had "so-so" success, and--with what's been going on in Washington for the past few weeks--I can't blame anyone that mistakenly interpreted my post as a serious endorsement of government-imposed inefficient investment in order to prop up the economy. Dr. Kovacs' study deserved better, and if you'd like to see better, please read this excellent discussion of the study by Richard Bennett.
Among the if-you-didn't-know-better-you'd-swear-it-was-made-up news from last week, a group of Republican House members--after imposing a minimum of $160 million per day in costs to U.S. taxpayers (not counting long term credit cost affects) from shutting down the government for what Sen. John McCain described as a "fool's errand" based on an inability to understand how the government works--sent a letter to the FCC complaining about a program [Lifeline] that they contend "continues to symbolize everything that is wrong with Washington."
Did you get it? Republican House members shut down the government--at a minimum cost of $160 million a day--because they failed to understand that the U.S. system of government requires the majority of both houses of Congress, and the approval of the President, to not only enact a law, but also to repeal a law--in this case "Obamacare." Then, these same lovable rapscallions send a letter to the FCC (where no one is working at the time) to protest the "Obamaphone" program--because that program represents "everything that is wrong with Washington." Pot-Kettle-Black much, gang?
One of the many, subtly-hilarious parts of the movie "Willy Wonka and the Chocolate Factory" is when Willy, played by Gene Wilder, offers a nauseous parent a "rainbow drop" candy which will allow her to "spit in 7 different colors." "Violet Beauregard", a gum-chewing, bossy little girl offers the unsolicited comment (while digging her finger up one nostril) "spitting is a dirty habit." Willy looks at Violet, and responds, "I know a worse one." Here, take a look for yourselves.
In this vignette, the woman getting sick is the low-income consumer, Acting Chair Clyburn is like Willy Wonka, and the House Republicans are like Violet--we'll just call her "Marsha"
Aside from the fact that these Republican House members seem to erroneously believe that every law the President is charged with enforcing must be cited with the prefix "Obama", i.e., Obama-Constitution, Obama-Bill of Rights, etc., they are clearly taking aim at any government program that could even arguably threaten them for the crown of "biggest waste of taxpayer money." Nonetheless, even the broken clock is right twice a day, so let's consider the basis for their ill-timed concerns.
In addition to a steady cascade of (mostly-unsubstantiated) negative publicity, the FCC recently imposed notices of apparent liability (NALs) against 5 Lifeline providers for approximately $14 million for submitting inaccurate and duplicative requests for reimbursement. It should be noted, though, that the FCC is not alleging that the providers in question defrauded the Fund by this amount. However, we should take away the understanding that the FCC is very serious about making sure that carriers submit accurate reimbursement requests.
The amount of the alleged overpayments by the Lifeline Fund to the carriers is relatively small, compared to the amount of "fines and penalties"--which are punishment for the violations that led to the overpayments. In total, the 5 carriers received $73,250 in overpayments, resulting from duplicative claims for reimbursement from a total of 2,753 customers (out of over 19 million enrolled in Lifeline).
So, to be clear, these Republican House members are not outside their rights to raise questions about the Lifeline program and its administration. They were, however, outside their rights to assume their conclusion--that the Lifeline program is not worth, or not possible to repair--before they even asked their questions. Nonetheless, even if they weren't right about their conclusions or even most of their questions, they do seem to exhibit ever so slightly more intuition about how markets work than the Commission.
And, while this ever so slight recognition of market incentives isn't in itself going to change the direction of the Lifeline program, it is a start to figuring out how the Commission is--if it ever is--going to get the Lifeline program firmly on the road to reform that it started over 2 years ago, that will eventually include databases to check inter-company duplicates and to be able to perform eligibility verification online as additions to its arsenal of best practices to protect program integrity. So, be sure and check in next week to part 2 of this "very special" Telecomsense series, to hear me expound on something I am very familiar with.
I recently saw an interesting program about the life of American music icon, and champion of the underdog, Johnny Cash. Johnny Cash met and performed for every President, from Richard Nixon on. When he agreed to perform requests for President Nixon, Cash felt two of the songs requested (neither of which were his) were unfair to the poor, or to the young (the "hippies"), and he refused to sing them. The song that was unfair to the poor was called "Welfare Cadillac", and portrayed those on public assistance (which Cash's childhood home was built with) as scammers, based on a few anecdotes of people who had abused the system.
For some reason, I thought about this story while reading the FCC's Lifeline/Link Up NPRM, released Monday. It goes without saying that in any government subsidy program, there are certainly going to be some that will use the plight of the poor as an excuse to rip off the program. But, these few scammers don't justify the unbecoming way in which the FCC portrays the growth of the fund in order to limit, or reduce, its size--without any regard to what the true size of the fund should be at this moment in time.
So, let's look at what's unfair about the NPRM. First, consider the "panic" about the growth of the low income fund. While it's true that the low income fund is growing quickly, that fact alone means nothing. The Commission seems to forget that--if the purpose of the low income fund is to make voice, or broadband, services affordable to America' poor--the fund should be growing as quickly as America's poor. That's not just a fact, but it's a fact that the FCC ignore, choosing, instead, to demean the purpose of the fund through unfair innuendo.
If you look at Paragraph 27 of the NPRM, the FCC cites some pretty "alarming" growth statistics about the fund, but here is where the NPRM begins to mislead, by exaggerating the "problem." The paragraph describes the increase in the fund through the years, noting that the fund dispersed an inflation-adjusted $817 million in 2002 (n. 48, p.12). The fund now stands at an estimated $1.3 billion for 2010.
The next sentence, though, inflames the fears the FCC seeks to instill in the public, stating that "in the last several years, a number of pre-paid wireless providers have become Lifeline-only ETCs, fiercely competing for the business of low-income customers by marketing 'free' phone service." The Commission goes on to conclude that, while this "development" has expanded choices for consumers, "it has also led to significant growth in the fund." The paragraph ends with the haunting specter that "[p]re-paid wireless ETCs now account for one third of all Lifeline reimbursements."
Now, let's just "unpack" those "facts" and get a little perspective. The low income fund is supposed to give a monthly, need-based, allowance to low income Americans to help defray the cost of phone service. Before leaping to its "reefer madness" conclusion, did the FCC ever consider the possibility that--regardless of how, or from whom, eligible consumers are getting their service--the number of poor Americans may have a hand in the fund's growth?
In 2002, 34.6 million Americans lived in poverty. By 2009, more than 9 million more Americans lived in poverty. Low income fund disbursements in 2009 were $1 billion. The "average" household in America consists of a little over 2.5 people (based on 2000 Census data at 4). If we do the math, then we learn that there were about 3.5 million more poor households added between 2002 and 2009. Keep in mind, also, that the eligibility requirements for Lifeline can be as high as 150% of the Federal Poverty Guidelines (for LIHEAP participation--a Lifeline-qualifying program), so these estimates are the minimum increases in Lifeline-eligible households.
What would you expect to happen even if only a third of the new households living in poverty were served by Lifeline? Well, the fund disbursements would have been slightly less than $1 billion in 2009 (assuming Tribal participation at today's rate)--in other words, about right. If all of the newly-poor households had participated (and no new ones were added in 2010), the low-income fund would have been well over $1billion in 2009--about what it is expected to be in 2010. Hmm? A "fact-driven" explanation for the growth? That's no way to build panic and urgency.
But wait! Aren't there still all those blood-sucking, pre-paid wireless, Lifeline-only ETCs? Well, there are really only two--TracFone Wireless and Virgin Mobile (now owned by Sprint). What about all the other names listed in n. 50 of the NPRM? The FCC found that it was in the public interest to allow those companies to provide more service choices for low income Americans, but the FCC has not yet granted these companies the further approvals that would allow them to actually participate in the Lifeline program.
Even if the FCC had awarded ETC certification to all those companies, though, what disgrace is that? The Commission acknowledges that more than a quarter of Americans have "cut the cord" (para 25), so why should it be surprising if a slightly larger number of low income customers have done the same? The Commission clearly wants more low-income Americans to be able to choose broadband as a means of communication; why not wireless?
It's good for the FCC to be concerned that fraud and duplication are limiting the efficiency of the low-income fund, and, I give the Commission credit for proposing a national validation/verification database. Such an improvement would be a welcome reform to carriers, administrators, and recipients.
Nonetheless, the tone of the NPRM, its misleading characterizations of the causes of fund growth, and many of the recommendations it makes (though the FCC concedes Lifeline has helped the poor (para 26)) conveys at best a grudging compliance with the Act's requirement that the USF serve low income Americans. At worst, though, a reasonable person could be forgiven for considering this NPRM the regulatory successor to "Welfare Cadillac." It's too bad there's no Johnny Cash on the Commission . . . .
At the FCC's monthly meeting yesterday, the Commission adopted a Notice of Proposed Rulemaking ("NPRM") proposing reforms to the Commission's Lifeline/Link Up programs. The Lifeline program provides up to a $10/month subsidy for eligible consumers ($25/month for Tribal Lands customers), and the Link Up program reimburses carriers for one-time charges associated with activating service. The text of the NPRM was not yet available at the time of writing, but the Commission's news release, describing the FCC's proposed reforms was available.
The Commission's motivation in undertaking reform of the Lifeline fund was the Federal-State Joint Board's Recommended Decision from last November. The Recommended Decision focused on expanding eligibility and participation in Lifeline, asking the Commission to explore more aggressive means to curtail waste, fraud, and abuse (for example, through the development of a national eligibility verification database), and drawing attention to the rapid growth of the low income fund in the period since the FCC first authorized TracFone to provide competitive, wireless Lifeline service in 2005.
In adopting the Lifeline NPRM yesterday, the FCC predictably recommended that consumers be allowed to use Lifeline assistance toward the purchase of broadband service, and the FCC wisely announced its intention to create a national verification/eligibility database. This solution has been proven to be successful at curtailing waste and fraud in states like CA and FL that have developed state databases. However, the Commission's reaction to growth in the low income fund did not stop at simply targeting waste in the program.
The Commission also seeks to "weed out" existing, qualifying recipients of Lifeline service that do not "use" their service for 60 days. For "free" prepaid wireless carriers, this makes sense. But, for every consumer actually paying for service, it makes no sense. Considering the additional medical expenses of America's seniors, some in the government have suggested that 1 in 6 elderly Americans live in poverty. Let's hope they don't ever require short-term care outside their homes--they might lose their wireline eligibility. This recommendation, though misplaced, is not the most outrageous suggestion in the NPRM.
Currently, the low income fund stands at $1.3 billion. The part of the high cost fund that goes to "competitive" high-cost ETCs--which the FCC knowsis highly duplicative--is slightly higher than the current size of the entire low income fund, so it is hard to understand the FCC's plans to evaluate capping the low income fund. Rather than lighten the contribution base by an amount greater than any waste in the low income fund, the FCC has chosen to "repurpose" these wasted, duplicative funds to create the newly-proposed Connect America Fund. See High Cost Reform NPRM, Paras. 243-244.
That the FCC would consider capping low-income assistance is all the more disturbing in light of the NPRM the FCC released last month on "reforming" the high cost fund. Recipients of high cost subsidies are supposed to be reasonably efficient. Yet, the Commission asks whether it might be appropriate--at some point--to "presumptively" cap existing high cost subsidies at $3,000/line/year (para. 210), however, carriers could always show that they really need more money. Meanwhile, the FCC also proposes allowing these same carriers to receive existing subsidies, whether or not they decide to provide broadband service--and potentially get more subsidies from the newly-created CAF. High Cost Reform NPRM, Para. 281.
What does the tale of two fund reforms tell us? Check out this excellent paper by Scott Wallsten of the Technology Policy Institute, and I think you'll understand. The paper shows that rural carriers spend 59 cents out of every "high cost" subsidy dollar received on "overhead" like lobbying expenses. Sure, it's a waste of our money, but could you really say it's a "wasteful" expense to the rural LECs?